NEITHER THE KSE NOR THE SECP
WANTS TO REMOVE THE FLOOR AND THE RATIONALIZATIONS GIVEN FOR MAINTAINING
IT ARE JUST NOT ACCEPTABLE

SHABBIR H.
KAZMINov 03 - 09, 2008

The last minute decision to maintain
the floor was deemed necessary but was a big disappointment. This floor was
introduced on 27th August 27, 2008. The KSE Board was of the opinion that
adequate stabilization measures were not in place as funding commitments for the
support fund had not been received while sufficient detail on the put option
remained elusive. One fails to understand the reasons for finalizing the
mechanism. The growing feeling is that brokers' fraternity did not the floor to
be removed.

It has been reiterated that present
crisis is not due to distortion in economic fundamentals. If the floor is
removed over three dozen brokers may default. The only solution is to create a
fund, which is ready to hold its investment for one year at least because
investors are not willing to exercise 'put option'. Since selling and outflow of
half a billion dollar is estimated the problem has compounded. Therefore,
removal of floor has to be deferred till the country gets commitment from the
international financial institutions.

The future of these stock market
stabilization measures remain unclear, especially of the Put Option dedicated
for foreign investors. It is anticipated that some of the issues surrounding
these measures will continue to be thrashed out over the next few weeks, but
removal of the floor before a bailout package for the country may not be
possible at all.

The KSE100 Index remained unchanged at
9,183 over the week. Though, volumes increased by 43.1% week-over-week, they
remained meager in comparison to the FY09YTD daily average of about 51.5mn
shares. Activity in off market transactions also remained subdued and declined
by 92.7% or 6.6mn shares on average in the previous week. SCRAs continued to
decline with a net outflow of US$ 4.4mn during the week; a cumulative US$
252.9mn has been disinvested by foreign funds in FY09YTD.

The local players and the regulators
should have benefited from the coordinated actions by central banks and
governments worldwide including a 50 bps cut in the US Federal Funds rate
prompted strong buying in international markets. Volatility was intense and it
is expected that markets will continue in an overall bear trend in response to
recent data indicating that the US economy is contracting.

The IMF has once again emerged as the
lender of last resort and started bailing out nations worst hit by the global
credit crisis. It has also announced its intention to form an emerging markets
fund of about US$ 100bn to help more countries. The IMF has already announced
funding plans for Iceland (US$ 2bn), Ukraine (US$ 16.5bn) and Hungry (US$ 25bn)
while talks are in progress with Pakistan and Belarus.

It is believed the IMF is likely to
focus on a tight monetary policy with a potentially steep hike in the discount
rate to curb inflation. At the same time, limits on public borrowing from the
central bank and public spend will also be imposed. The IMF is also not likely
to be significantly pressed to further devalue the Rupee since it has already
depreciated by 38% against the USD since January 2008. Depending on the nature
of the funding disbursement, it may be entirely possible to see a short to
medium term appreciation of the Rupee should the bulk of funding be frontloaded.
However, the growing consensus among the local experts is availing the IMF
facility could further aggravate Pakistan's financial vows.

As regards equities market support
fund, the Senate Standing Committee on Revenue and Finance has endorsed a
package worth Rs 50bn for the capital markets. In this connection, the

Advisor to the Prime Minister on
Finance visited the KSE and chaired a meeting of prominent figures at the KSE,
SECP and financial institutions. In the wake of these, it is hoped that
implementation details of the equity market support package could be finalized
which should lead to swift resolution of outstanding issues and subsequent
removal of the floor.

As regards easing of pressure on
Pakistan's fast depleting foreign exchange reserves the announcement of trade
statistics for the month of October showed some decline in imports on a MoM
basis due to the falling price of oil. Also inflation numbers are eagerly
awaited as if these end up below target for a second month running ñ inflation
will be closer to peaking than previously thought. Further details of the
proposed IMF package will be the key in determining future growth outlook and
economic recovery.

The latest development is that the
brokers have formed their own equities bailout plan amounting to Rs 25 billion
after failing in convincing the government and the central bank. It is believed
that the funds will be brought from outside to avoid any pressure on country's
foreign exchange reserves.

As such off the market transactions are
taking place up to 50% discount to the quoted prices. Since most of the scrips
belong to 'blue chip' category and also enjoy strong economic fundamentals any
serious investor have long-term perspective should be willing to buy at the
prevailing prices. Some of the experts are of the opinion that local investors,
who had taken their money to Dubai, are also ready to bring it back.

They also believe that the economic
managers have to establish their credibility by showing their willingness to
take timely decisions and involving all the stakeholders. So far their apathy
has created a perception that they are either not willing to take any crucial
decision or lack the expertise to take some of the difficult decisions.

Last but not the least, the floor has
to be removed and earlier this decision is made the better it is. It goes
without saying that all the necessary steps have to be taken to absorb selling
estimated around half a billion dollar and additional reserves have to be
attained to avoid any pressure on fast depleting foreign exchange reserves of
the country